Exchange Rates and International Reserves: A Threshold Cointegration Analysis

This paper models the long-run relationship between exchange rates and international reserves in a sample of African countries over the period of 1980:01 - 2004:04. The empirical methodology uses threshold cointegration technique that considers the possibility of a non-linearity. The results have indicated that a long-run dynamics exist between the series. Cointegration occurs when the divergence between the two is above the threshold point estimate. The threshold point estimate varies from country to country, reflecting the country’s exchange rate regimes. The floating regimes seem to have higher threshold than the peg regimes and the exchange rates adjust more than the reserves.